Monday, August 07, 2006

Calls of Note Part 4

- JP Morgan is reiterating their Overweight rating on shares of Avnet (NYSE:AVT) and adding the company to the JPMorgan Focus List with a six month price target of $24 (10x $2.40 FY07 EPS estimate). Firm's target multiple is slightly above current levels but in-line with publicly traded peers as well as within long-term average levels.

Over the past two months shares have retraced back to April 2005 levels and in firm's view investors are not giving AVT credit for the cost synergies the company has realized post the Memec acquisition as well as appear a bit overly pessimistic on the company's organic growth.

By their calculations AVT's fundamentals are likely to exceed prior cycle peaks in FY07 in terms of revenues, EPS, efficiency, balance sheet velocity and returns. Firm concedes they're fighting a difficult tide of less than stellar datapoints regarding the current state of demand across the semiconductor supply chain, but believes seasonal factors should provide some modest level of stability that should benefit AVT.

In their view the largest risk factor is demand. Overall, JPM's US Semiconductor and Enterprise Hardware Teams have largely held their 2006 industry revenue forecasts inline (6% to 9% growth) since January while firm's supply chain demand model now registers 2006 OEM order growth of roughly 13% y/y (vs. 7% y/y back in January '06).

Firm realizes adding the stock to the Focus List this close to reporting 4Q06 results (reporting on Wednesday morning) likely leads some to view this as nothing more than a call on the quarter. They note that while they are constructive on the prospects for this quarter ($0.01 ahead of the street at $0.59 including option expense) as well as for next quarter, their higher than street estimates for FY07 ($2.40 vs. $2.23 consensus) are reflective of belief that cost cutting over the next twelve months is the larger driver of earnings performance relative to the need for better than normal end demand to lift profits.

Notablecalls: Not actionable but good to know category. The stock has come down hard over the past months and may have some upside in it. Just a trade.